SEBI guidelines on credit ratings to improve industry standards, benefit investors: Crisil

The Securities and Exchange Board of India (SEBI) late on Tuesday issued guidelines to enhance the standards of the credit rating industry, including mandating more disclosures by credit rating agencies (CRAs), ensuring greater discipline in the rating processes, making rating outlooks compulsory, recommending performance evaluation of rating committees, underlining the process to be adopted in the event of non-cooperation by issuers, and underscoring steps to strengthen internal audit process.

Says Ashu Suyash, managing director and CEO, Crisil Limited, ''Investors will benefit immensely as the rigour and disclosures will contribute to better pricing decisions. We are committed to implementing these guidelines. In fact, many aspects of these guidelines are already a part of our existing processes.''

CRAs will now have to publish a standard set of detailed criteria documents.

Further, policies pertaining to the general nature of compensation and monitoring of ratings will also have to be disclosed on the website. This will
ensure investors have access to crucial information on rating criteria and its application.

The guidelines also require disclosure of ratings that haven't been reviewed in a timely manner. This will increase the accountability of CRAs and lead to better discipline in rating reviews.

Says Pawan Agrawal, chief analytical officer, Crisil Ratings, ''Investors will also benefit immensely because rating outlooks have been made mandatory, which reduces the possibility of sudden and sharp rating changes. Outlooks enable investors to anticipate the direction of rating changes over the near-tomedium term. Crisil has been assigning rating outlooks on long-term instruments since 2003.''

The guidelines also enhance transparency by making it mandatory to disclose the composition of rating committees and sub-committees, and the eligibility for membership. This will mean many CRAs will have to now build talent pools to facilitate this. Sebihas recommended guidelines for the evaluation of decisions taken by the rating committee, which will be reviewed by the CRAs board.

Sebi has, through the guidelines, also reiterated its stance that CRAs need to review their ratings on an ongoing basis over the life of an instrument, despite issuer non-cooperation. This has implications for suspension of ratings.

The key, however, for CRAs will be getting information from unlisted companies in a timely manner. Crisil believes ongoing regulatory support will be necessary to ensure this.

Sebi has also enhanced the scope of internal audit to ensure adherence to the policy of default recognition. This will increase the accountability of CRAs and improve the reliability of default statistics, which is the de facto report
card of a CRA's performance. This will require CRAs to recognise defaults in a timely manner.

Another aspect to note is the mandatory disclosure of unaccepted ratings. While this is aimed at improving the transparency in credit ratings, its efficacy within the Indian context will be known only over a period of time.

Overall, Crisil believes that these guidelines are timely and will go a long way in the strengthening and developing a vibrant and deep corporate bond market in India.